Question

If real income rises 4%, prices rise 1%, and nominal money demand rises 4%, what is the income elasticity of real money demand?

Answer 1

The income elasticity of real money demand d. 3/4

Increase in real money demand = Increase in nominal money demand - Increase in inflation = 4% - 1% = 3%

Income elasticity of real money demand = % increase in real money demand / % increase in real income

= 3% / 4%

= 3/4

Income elasticity of demand is a monetary measure of how responsive the amount of demand for a very good or provider is to trade-in earnings. The formulation for calculating earnings elasticity of demand is the percentage change in quantity demanded divided by using the percent change in earnings.

In economics, the profits elasticity of call for is the responsivenesses of the quantity demanded an amazing to an alternate in patron profits. It is measured because of the ratio of the share exchange in the amount demanded to the proportion exchange in profits.

If the earnings elasticity of call for is more than 1, the best or carrier is taken into consideration a luxury and profits elastic. An amazing provider that has an earnings elasticity of call for between zero and 1 is considered an ordinary correct and income inelastic.

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